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The Per-Diem System: An Easy Way to Budget Your Spending Money

As a guy who just finished paying off $14,000 in credit card debt, I wanted to share one tip that helped me get over the bad debt hump. I allocate my spending money on a per diem system. At the beginning of each cycle of my monthly budget, I set aside funds for:

Every fixed expense that I have (rent, cable/internet, groceries, power)

After allocating this money, I go to the bank, withdraw the remaining funds in cash, and divide it among envelopes for each day of the month. Each day, I open an envelope and add the day’s cash to my wallet. For me, the physical parceling of the cash is an important psychological step.

I tried just having the cash on hand and doling out the right amount each day, but I kept dipping into it whenever I was in a pinch. By investing a small amount of work in the division of the cash, dipping into my reserves makes me feel like I am undoing work instead of just taking an advance.

My all-cash diet keeps me honest about my spending habits. When I started, I allocated one amount for Monday through Thursday, and double that amount for weekends and holidays. I have more leeway in my cash flow after paying off my credit cards, so now I just have one flat rate for each day.

Here’s why I like my system:

Because my budget takes account for my necessities and savings, I never have to feel guilty about spending money. My per diem is meant to be “walking around” money — the whole point of having it is to spend it.

Spending only cash stops me from treating my finances as out-of-sight, out-of-mind. I know darn well how much I can spend because it’s right there in front of me.

Although my per diem is meant to be spent, I usually save a little every day. After a while, it’s easy to build up a nice $200 cushion in my wallet that is regularly replenished. And if I want to splurge on a night out, I can. In the morning, I will just be back to normal, not in the hole. Now I always feel like I have money in my pocket (because I do), even though I am actually on a strict budget.

The most important thing I have discovered using a per diem system is to be honest about your actual monthly expenses. It’s better to add an item to you monthly budget and reduce your per diem than to try to shoehorn in a recurring expense. For example, smokers should budget for cigarettes and not pay for them out of the per diem. The per diem is meant to only pay for expenses that you cannot otherwise predict.

It’s better to have a low per diem (when I started I could only afford $12 on weekdays) than to regularly wipe out your per diem with recurring charges. In the long run, that will just frustrate you and make you feel perpetually broke.

J.D.’s note: Each of us has our own unique approaches to money management. We develop our own tricks — or money hacks — to circumvent our personal weaknesses and to help us meet our goals. If you have a personal money hack you’d like to share with GRS readers, please drop me a line. Photo by chrisdlugosz.

This is a great way to start a budget, I totally agree. My wife uses a similar system—one that just doesn’t jive with me—and it works for, which is what matters.

I think the problem with it that a lot of people have is when they see that Spencer is paying all his bills ahead of time, plane tickets (or what have you), and saving 8% of his salary (pre 401(k), mind you), and he still has enough money to “walk around” with.

It’s a great system, provided you have enough money to even cover those basics. I know it’s nitpicky, and that this is a great way of getting started no matter how much you make, but I can see myself around 4 years ago reading this and going “Where is all this money going to come from?”

This is a really interesting system. I think it’s so important for each of us to come up with a system that works for us. Without a system, I find that I end up going through money without much to show for it (or even any idea, really, where it all went).

I enjoy reading about other people’s strategies for managing their finances. Thanks for the post.

Oh, I actually am trying something like this – but I do it on a weekly basis. After making allocation for everything else, I divide the remaining balance into 4 and withdraw that amount every start of the week. I do think divvying them up by day is a bit tedious though.

This actually came from an idea suggested in an entry here a while back called “spending allowance” or something like that.

This is pretty much EXACTLY how I budgeted my finances while I lived in Japan. I got paid once a month there, and it’s pretty much a cash-only country.

I did pretty much what Spencer did. I took the money for my bills and transportation to work and set it aside. Then I gave myself a rough equivalent of $25 a day (for everything – groceries, shopping, dinners out, etc), and saved the rest (savings being about 50%!) True, I had no debt to get rid of, but I was ok with living fairly frugally during the week so I had the money to travel and explore on weekends (from my per diem) and on vacation time from work from my savings.

I LOVED how the per diem system worked for me. It made it so much easier to avoid convenience stores and ‘silly’ purchases, because I like watching my money add up to then spend on an all-nighter in Tokyo, or a new camera, all without touching any of my savings, and without feeling guilty about spending it.

I myself do something similar, but I do it weekly. After already allocating my monthly income towards bills, needs, etc., I take out a ‘weekly cash allowance’ from the ATM each Monday. That is the cash I carry around each week. Once its gone, I don’t spend anything else until the next Monday.

Great idea! I try and often miserably fail at the weekly system. Trying to pay cash for non-fun expenditures (kids’ clothes that I see on sale, groceries, etc.) kills me. Maybe I could use a modified system wherein I have two envelopes – one with frivolous money and a second with budgeted unscheduled items. More food for my thoughts, which is what I love about GRS.

This is an interesting concept! It reminds me of the more traditional envelope system, with the exception that cash is replenished daily, rather than monthly (or every paycheck). I may give this a try beginning next month, but I’ll need to build up a little cushion first.

I always find it interesting how other people manage their money, and this was no exception. It sounds like this system works for a lot of people.

I’m curious, though, about the dollar amount per day. The author says at the beginning, he could only afford $12 a day. Am I the only one who read that and thought, “wow – you regularly spend $12 a day on non-recurring expenses?” Perhaps I’m more frugal than I think I am, or perhaps I’m not totally understanding what his per diem is meant for, but it is actually a rare day when either my husband or I spends money on things other than bills or other very necessary expenses (like gas or groceries). I don’t feel that we are missing anything – ie I don’t feel deprived by not spending money. When one of us does see something that would bring us genuine happiness to have (like a Blind Pilot CD I ordered last week after hearing them on NPR…), we don’t worry about buying it.

Anyway, I just wondered if I was the only one who thought that was interesting. How often do you indulge in ‘fun’ spending? For me, I’d estimate that it’s maybe once a week.

Like jonoave above, I do something very similar on a monthly, then weekly basis. I have a one month buffer — my paychecks in April go toward May, so by May 1 I have the full month’s budget sitting there. I take out money for student loans, savings, rent, utilities, etc., until I have about $1200 left. I divide this by 4, then spend it on whatever I want to. I hate “budgets” that tell you to cut out this or that — if I want to be lazy and drive to work instead of taking the bus, I have less money for going out to lunch. If I want a plane ticket that month, I might have to pack my lunch every day.

The important thing is that I took care of my savings and fixed costs first and the amount of “spending” is a figure I am comfortable with. I’ll “save” some of this money for purchases/ trips/ etc. — but I know how much I have to live with and I don’t feel guilty about my spending choices.

By the way, if you have the discipline, (I do), you can do this with a credit card. I have a 3X5 card in my wallet where I keep track daily of the spending . . .

I am interested in this idea but just doesn’t seem to work the way I live. I don’t buy magazines, coffees, and pack my own lunch so even if I have a 5 in my wallet it could stay there for weeks. However the stuff I spend money on are things that kind of fall in between neccessities and frivolous purchases (new bath mat, kid’s clothes), and typically gotten over the internet or using a debit card. So would I put those things into the neccessities pile or the per diem? The second problem if we use cash we have no idea where the money went.

At home, we don’t use the cash system because we don’t have a lot of wiggle-room in the budget right now.

However, we do use a system pretty much identical to Spencer’s when we travel. Last time we made a trip, the cost of airfare and hotel were charged (fixed expenses) and we allocated cash for the airport, transportation to and from our hotel, and a daily per diem for food, etc. Because we were aware of our budget, we managed to have a great time with money left over. And it was a good thing, too: we forgot to budget for airport parking!

i also go for weekly, and that allowance includes *everything* outside set-in-stone bills. so, when i get my paycheck, it looks like this:

1) direct deposit to checking of enough for my set bills for that period plus $100 per week (i’m paid every two weeks, so set bills plus $200). everything else to savings at ING where i don’t see it regularly.

2) go withdraw $50 or so for the Weds-Weds first week or, buy groceries or more expensive things like a restaurant dinner or gas on my rewards credit card, and pay that off the next morning.

3) rinse and repeat.

my “per diem” comes out to about $14 a day, then, but includes the cost of any meals or gas i buy, groceries, everything. this means that i generally don’t buy little stuff, since i’m in debt-reduction mode at the moment and admittedly cutting things close.

the one thing that has really helped me build up a cushion, though, is keeping a checkbook “register” on my computer and rounding every transaction up by $1 or so, usually to the nearest $1 or $5. that’s been such a great part of budgeting and learning to leave a cushion in my accounts even while i’m being fairly extreme in my budgets.

We’ve been using a system for the past two months where we have one checking account that is used for all the regular monthly bills. I keep a dead-accurate spreadsheet with the daily balance projected out about 6 months. A second account gets a weekly transfer of several hundred dollars with the intent that we only spend what’s in that account. That spending is mostly groceries but it includes gifts, copays, pizza, etc. It has been working ok until this weekend when we fell off the wagon. I sat bolt-upright in bed 1 am monday morning and though “I have no idea how much we spent since friday.” Luckily most of the debits were still pending and I was able to do an online transfer to prevent an overdraft.

Cash would prevent this, but between me and my wife we never know who will be stopping for groceries what day, etc.

I had the exact same problem. I’ve trade about 15 different types of budgets and the thing that kept wrecking them for me was I didn’t need to budget 20 dollars a month for clothes *every* month but when my jeans got a hole in them I needed new jeans or if I ran out of contact solution, etc. These things didn’t nicely recur and trying to plan for every little thing and when it was going to happen just wasn’t working.

My new budget is fairly simple. I’ve set up a section for my fixed expenses (rent, cable, phone, utilities). At the start of each month I also list out my “Planned Expenses” there. For instance this month I knew I would have to pay $20 for my vehicle sticker.

And then I’ve set up a section with one of two categories “Free Spending” or “Necessary Purchase”. If I need those jeans I talked about… necessary purchase but if I see a new shirt I don’t really need “Free Spending”.

A lot of months I have extra money left over that I didn’t spend because no necessary purchases came up or I didn’t spend all of my free spending money in which case I have more to transfer to savings at the end of the month!

Like kj@11, while I think this whole cash allocation is a great idea, my thoughts are “what in the world would I need $12 for every day as a minimum?”. If I pack breakfast and lunch, gas and bus pass are in the regular budget, so are grocery, and I go straight to work, then straight home – where would I spend cash? May be the idea behind getting more frugal is getting busy? Run-work-home-take kid for his sport-home. I think, this blog was saying a lot and about priorities. I know many a people call me not only frugal, but cheap. I say – how come, if every month I am able to travel to beautiful places for a run in the mountains? I choose what to spend on. I don’t carry any debt – never did – and do have emergency fund and saving, along with some retirement money (but this one is very skinny, I know). I think my way of living comes with the territory of growing up in Soviets – first of all, there was no credit card or loan, period. You deal monthly cash. Secondly, the salary is so tiny, you can only afford necessities and not splurge. You learn to love it the way it is. You “splurge” cheaply too. Third, and that is a negative for me now, but worked back home, as bad as our retirement plan was, somehow government took care of us – at the minimum, and then the family roots were so strong, kids would help too. That is the thing that as much as I understand it’s not going to happen here, is very hard to change for me. I am trying with what I can. I just don’t have a hearty trust in a stock market system, it’s almost easier to “stash the money in a sock”:)
Great blog, JD, been reading for a couple of months now, love the frugality tips, though really can’t find anything new for myself, but reinforcement is great. My fiance, though, an American, is thrilled to learn how to pack a lunch, buy food on sale and take a no-toll road. It is so much fun to do it when you just start!

I am unemployed and basically homeless, living with friends. My plan, when I become employed, is to save 6 to 8 months of living expenses (my “emergency fund”) before I move out on my own -if my friends can stand me for the time it’ll take to do that!

Then I will budget the way I used to: Two checking accounts: one for regular bills (utilities, rent, etc.) and another account with a debit card for daily and “mundane” expenses such as gasoline, groceries and entertainment. Also, two savings accounts: one for the emergency fund, to which I will add money on a scheduled basis, and the second for annual bills and future purchases (furniture, college courses, vacation, gifts, etc.)

Four bank accounts is too much for some, but this system has worked for me for over 10 years. The only difference is that I may now have the ability to create an emergency fund for the first time in my life.

Another change for me will be maintaining one month’s worth of expenses in the bank so that at the beginning of the month, like Spencer, I’ll already have the bill money. No more waiting for a paycheck before a particular bill gets paid.

I take care of my savings first too, fixed costs and irregular costs, via automatic withdrawals to various savings accounts, then just deal with cash the rest of the month. Here’s a tip for easy savings that I started this year. Instead of putting all your loose change together in a jar, I have 4 jars – one for pennies, nickels, dimes and quarters. It’s just easier to roll that way later, when you’re in the mood. But the thing is that if an item is $1.02, I give them $2 to purposely get back the change, then put it in those jars at the end of each day. In a year’s time, I’ll have accrued a pretty good savings without even hardly noticing it!

I do exactly what Spencer does – it helps me with the immediacy of tradeoffs. For example, do I want a croissant with morning coffee, or am I meeting friends for lunch? Do I want to buy a book at lunch, or go for nachos and a beer after work?

By having a DAILY limit, it really makes a difference. I think it’s having to flex that “no” muscle more frequently.

My budget is $7 per weekday, and $10 per weekend or holiday. That’s about $230 per month. The leftovers (typically about $40 per month) get stashed into savings, or go towards a short-term spending want.

I do NOT account for gas from this – I have a separate gas budget, assuming I fill up about 3x per month.

I combine the daily per diem strategy with envelopes for a couple other “easy to spend too much” categories. For me, one is personal care. I like to get a massage, or buy makeup, or get my brows waxed. It can really add up, so I have a cash envelope for that category.

I also have a cash envelope for routine maintenance and car care – oil changes, car washes/detailing.

It’s a process, but in the past 6 months, I’ve gone from saving 15% of my gross salary, to putting aside 26% of my income.

Final note: a written budget has REALLY helped with identifying priorities and making decisions for the BIG picture.

It’s an interesting idea. I like the whole allocation part of it, but I must admit I don’t often carry more than $20 cash on me or keep money around my apartment. However, I think this will be a great trick to try for my trip!

I think this is a great money hack. I use something similar, but it includes my grocery expenses because I don’t consider those “fixed” in the same way that the rent or the phone bill are.

Basically, I give myself a weekly allowance. Back in 1994, it was $100 a week. Now it is up to $160 (damn you inflation!). This amount covers everything I’d buy at the grocery store, as well as occasional entertainment, dining out, and incidentals like a soda on a hot day.

I pull the money from the ATM on Monday and it has to last through the next Sunday. During the first of the month I always make sure my grocery list includes some pasta and sauce and some similar pantry staples. That way, if I get a little excessive at the beginning of the week; I still have something to fall back on without dipping into the future’s cash. I like Spencer’s idea of the daily envelopes. It might help me smooth out the week’s expenses. Then again, I know I’m going to spend more than $20 when I go to the market.

“I feel like I have money in my pocket (because I do)” is what stood out to me. It’s not deprivation, because you have what you need.

For those wondering about infrequent expenses, would it work to ‘pay’ the money each month, then have it when you need it? I don’t buy clothes every month, either, but I have ‘clothes’ in my monthly budget, and if I had to, that money could go into a ‘clothes’ envelope, pretend-spent, until I needed new pants. I pay my car insurance in one big lump, but it’s budgeted into each month so I don’t spend it. Same with tuition– a couple hundred a month goes into savings so each semester, I can drop a thousand without changing my habits.

Thanks for the comments, everyone. And thanks to J.D. for posting this. Just to answer a couple questions you all had:

1) $12 a day is what I started out on. It’s higher now. I live in NYC and the cost of living is high. I also buy my lunch most days, though, I’m planning to start brown-bagging three days a week starting next week. I try to achieve my financial goals while living a frugal yet comfortable lifestyle. I don’t mind buying beer at a bar even though it’s cheaper if I were to have it at home. I like out out — that’s how I like to live. My per diem system gives me an instant cost-benefit tradeoff. It’s all about what you are comfortable with and what you can afford.

2) Divvying up the money into envelopes only takes me about 15 minutes a month.

3) I tried doing this weekly, but it didn’t work. My goal is to always have cash available for living my life. I hated it when a surprise expense or slip-up on Monday messed up my weekend plans.

4) I actually leave a small amount of cash reserves in my bank account in case I there’s a situation where I need to buy something with a debit card (you often have to Fandango movie tickets in NYC when they first open, for instance). But if I wanted to buy an item of clothing that I saw online and I hadn’t scheduled that purchase in at the beginning of the month. I would actually save up the cash and then deposit it in the ATM before I made the purchase.

5) Gift purchases come from the wallet unless I specifically wrote it into my budget at the beginning of the month.

6) My biggest frustration when I was paying down my debt was that I always felt broke. And because I had gotten religion about my debt, I sometimes felt guilty about spending on myself. I developed my system so I could have peace of mind about my spending and achieve my financial goals at the same time.

Thanks for all the feedback. I hope my system helps someone else out there.

When traveling for work, we receive a literal per diem, usually between $35 and $50 depending on the location. A former coworker would go to the ATM the first day of the trip and get a twenty-dollar bill for each day. Every morning, the twenty goes in his wallet, and every evening, anything left goes into a deep dark pocket in his suitcase.

I got in the habit paying in cash when I started doing a lot of foreign travel. Most places outside of the US do not take credit cards because of the fees. If you go shopping at tourist malls, you’re fine with Mastercard/Visa. But if you shop where the locals shop, you need cash.

I tried the envelope system a few times, and it doesn’t quite work for me.

I’m curious about the logistical aspects of Spencer’s plan. For instance, I have a weekly cash allowance (£50), so I just go to the cashpoint each Saturday and withdraw that amount; this would work equally well for any multiple of £10. This money goes into my wallet, then anything left at the end of the week goes into my piggy bank.

If I wanted to divide that up into £7/day, that would be quite tricky; I just get £10/£20 notes from the cashpoint. Do you have to go along to the bank and ask them for a big pile of coins, or do you give yourself change each day? For that matter, $12 x 7 = $84, so presumably you can’t pull an amount like that out of a cashpoint. If I had to go to the bank each week to withdraw money at the counter, it would be quite awkward, because I’m normally at work while they’re open.

I love this concept! I have tried to suggest this to my husband- which has not gone over so well. He likes the convenience of the debit card. I am following a financial expert that you all may find helpful in her tip a day in April due to Financial Literacy Month- her tip yesterday was to start using cash again- how timely! You can check it out here http://www.slechter.com/30-tips-to-ensure-your-financial-fitness

I use a biweekly allowance. It sounds like something you’d give to a 10 year old, but it works. I pay all of my bills and then give myself a cash allowance for the next two weeks. I wasn’t diligent enough with my debit card to track it, but I *always* know how much I have for the next two weeks, because it’s in my back pocket. I use it for everything that’s not bill related. Cheeseburgers? Allowance. Coffee? Allowance. Video games? Allowance. Sometimes I’ll put gas on my debit card, sometimes I’ll spend from my allowance, depending on my mood and checking balance. I’ve been progressively shrinking it, as I feel I can. I started this about 9 months ago. Back then, it was $300/2weeks. About 5 months ago, it shrank to $200/2weeks. About 3 months ago, it shrank to $100/2weeks. It’s amazing how little fast food I eat now.

Like Cathy, I use this method for foreign travel. Setting a budget of say $40/day for a vacation (including lodging of course) makes it a lot easier to plan and budget for a trip. Also most of the places I travel to either don’t take cards, or they charge big premium for using them.

This method isn’t suitable for me for day-to-day life in the USA because 1.) I spend no money, or very close to no money, on Monday-Friday, and 2.) my bills such as rent, cable, and power are paid monthly not daily.

Like many of those who commented, we use a combination of envelope budgeting, bill allocation and cash. We use the program MVELOPES to manage this. Spencer’s idea is particularly intriguing for our fun money disbursements. My wife and I each get $300/mo to spend on what we want. I sometimes can get to the next month with $200 still in hand. However, she often seems to be all out by the 9th.

I have a very detailed 12-month spreadsheet which functions as a budget and balance sheet. I plan out the whole year in advance and try to anticipate everything I can think of (looking at previous years as a model). As the year goes on, twice a month (because I’m paid bi-monthly), I replace the contents of the cells with their actual values.

The expense section functions like a budget. All the fixed expenses are separated out. The two variable expenses are identified as “cash” and “creditcard.” The predicted values are the amounts I allow myself to spend for the half-month period. (For the purpose of obtaining cash back rewards, I prefer to do all the spending on credit card, so the amount allocated to cash is comparatively low.)

For expenses, I try to come in under the amount allocated for each period and I usually succeed. With the additional amount saved, I transfer to my savings or debt repayment above and beyond the fixed amounts I pre-planned.

Maybe this is nerdy, but I can’t wait for December to do my year-in-review as I try to enhance the model for next year.

I like the system for parceling cash. At one time when reading Dave Ramsey, I decided not to use his envelope system because “I can handle it” and I like earning points with my check card. The truth is I don’t have the discipline to limit myself. It is too easy for me to just overspend when I know the money is available in my account. I am going to forgo the points for a while and start carrying a set amount of cash and leaving the bank card at home.

I am absolutely hopeless with money and allways end up spending my entire paycheck every month with stuff all to show for it.

sitting down and working out how much my actual expenses are has really opened my eyes…. I worked out that after paying all my recurring expenses and allocating $20 per day… i have $1089 left of my monthly pay… that at the moment, i am wasting…

As of my next monthly pay (end of april), i’m going to try this budget, the challange will be sticking to it.

This is something I had already considered, but divvying up the cash would be difficult. I gave us a budget, but it included things like groceries, we really should make room for some spending money but I keep wanting to throw it at our debt.

I think we’ll have go back and carefully track who spends what and develop a per diem that way. (we share the finances in our house)

Over the last 9 months, I too have been using a very similar system combined with tackling my biggest debts. Other than my mortgage I am virtually debt-free. However, by adopting various systems AND sticking to the one(s) that work, I am on track to be clear of debt within 7 months.
I already feel a weight off my shoulders for the debts I have cleared. To be clear of all other debt (except mortgage) will free me further.

I do my budget once a month. I go into the bank and ask for the correct denominations upfront instead of making change afterward. Dollars come in smaller denominations than than pounds, so I never get coins. I can see how you might end up carrying around some coins in the UK, but as I remember from living in London, change is just a fact of life across the pond.

If it bothers you, just ask the next vendor you buy something from to change your coins for a £5 note as soon as you have that amount in your pocket.

Sure, there’s a small amount of math involved in this system and you have to make the time to get your cash straight but it really only takes me about 30 minutes a month total to do this and the psychological relief (at least for me) is worth it.

Seems a little complicated, and only for the most disciplined. A more important issue is how does one NOT rack up $14,000 in CC debt in the first place. I don’t understand how this can be possible, except if it’s a medical emergency or necessity. You should just put say a $1,000/month spending limit on your CC, and pay it off every month. Don’t let it grow. Just like weight gain. After 20lbs, it’s obvious, and it’s time to go on a diet.

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